7. The Security Is Act Of 1933 And The Primary Markets

Question 1

True or false

The primary market is where securities are sold to the investing public in what are known as issuer transactions.

• in other words, the issue of the securities receives the proceeds generated by the sale of securities.

Answer 1

True

Question 2

In contrast to primary markets

Secondary markets are where securities trade between investors.

True or false

Answer 2

True

Question 3

Another term for primary and secondary markets is __________.

Answer 3

Capital markets

Question 4

True or false?

When you see the term primary offer or primary market, you know that we are talking about an issuer (corporation or a government) that is selling a security to raise capital.

Answer 4

True

Question 5

A _______ offering is one in which the proceeds raised go to the issuing corporation.

• the corporation increases its capitalization by selling stock (are there a new issue or previously authorized but unissued stock).
  
  • it may do this at any time and in any amount, provided. The total stock outstanding never exceeds the amount authorized in the corporations bylaws

Answer 5

Primary offering

Question 6

True or false?

Public offerings of securities are regulated under the securities act of 1933

Answer 6

True

Question 7

True or false?

The primary purpose of the Securities Act of 1933 is to require full and fair disclosure and connection with the sale of securities to the public

Answer 7

True

Question 8

This act requires that a new issue, unless specifically exempted from the act, be registered with the SEC before public sale

Answer 8

Securities act of 1933

Question 9

Known as the first time an issuer distributes securities to the public.

• any subsequent money raises are known as _________ offerings or additional public offerings (APOs).
  
  • are popular methods for companies to raise additional equity capital in the capital markets through a stock issue.

Answer 9

Initial public offering

Follow-on offerings

Question 10

Are defined as

1. Member firms
2. Employees of member firms
3. Finders and fiduciaries acting on behalf of the managing underwriter, including attorneys, accountants, financial consultants and so on
4. Portfolio managers, including any person who has the authority to buy or sell securities for a bank, savings and loan association, insurance company, or investment company
5. Any person owning 10% or more of a member firm?

Hint

This relates to those not allowed to purchase shares at the public offering price (POP)

Answer 10

Restricted persons

Question 11

How many primary offerings can a corporation issue?

A. One primary offering
B. Two primary offerings
C.. Three primary offerings
D. Unlimited

Answer 11

D.

A corporation can sell as many shares, and have as many offerings, as a can get people to buy the stock.

Question 12

What federal law regulates the initial sale of securities to the public?

A. The securities act of 1933
B. The security is exchange Act of 1934
C. The investment company act of 1940
D. The truth in investing act

Answer 12

A.

Question 13

Which of the following may purchase an IPO at the POP?

A. Jim, a registered representative for seacoast securities
B. Jim’s brother Robert, a. Contractor
C. Jim’s niece, Amber, a. Chef
D. Jim’s father Roy, a retired engineer

Answer 13

C.

Jim, an employee of a broker dealer, is a prohibited person, as our his spouse, parents, siblings, children, and various “in-laws”.

Aunts and uncles are not on the prohibited list, nor are nieces and nephews

Question 14

Take note

Answer 14

In securities, the term person refers to a natural person (human being) or a legal entity (such as a corporation or a government). Any entity that can legally enter into a contract as a person

Question 15

An _____ is a corporation, government, or other entity that is selling a security to raise capital for itself.

• they are issuing the security.
• corporations may issue both equities and debt issues (stocks and bonds).
• a government entity may issue debt

Answer 15

Issuer

Question 16

Larger corporations stock (after issued) that trade on a national exchange (listed) or the Nasdaq system are called?

Answer 16

National market system securities

Question 17

Those who stock will not be listed

Answer 17

Non- NMS securities

Question 18

Our governments at the state or or lower level, such as counties and cities.

This debt is sometimes called munis

Answer 18

Municipalities

Question 19

Is considered the largest issue or of debt in the United States?

Answer 19

Treasury department

Question 20

Debt issued by the government is sometimes called _____.

Answer 20

Govies

Question 21

Are groups of BDs or investment bankers that work with an issuer to bring its securities to the market and sell them to the investing public.

Answer 21

Underwriters

Question 22

_______ bankers help the issuer to structure, capital raises and, at times, form syndicates with other underwriters to facilitate this money - raising process.

Answer 22

Investment bankers

Question 23

_________ underwriting calls for the underwriters (syndicate) to buy securities from the issuer acting simply as an agent, not as the principal.

• This means that the underwriters are not committed to purchase the shares themselves and therefore are not at risk
• closed by collecting client funds into an escrow account, so no underwriter capital is at risk in these types of offerings
• the underwriter is acting as an agent contingent on the underwriters ability to sell shares in either a public offering or a private placement
• the underwriter is not at risk for the shares, but the issuer is.
  • if all the shares cannot be sold, the issuer will not raise the capital needed.

Answer 23

Best efforts underwriting

Question 24

What are the two types of best efforts underwriting to be familiar with?

Answer 24

All-or-none (AON)

Mini-max

Question 25

______ underwriting, the issuing corporation has determined that it wants an agreement outlining that the underwriter must either sell all the shares or cancel the underwriting.

• because of the uncertainty with this type of underwriting, any funds collected from investors during the offering. Must be held in escrow, pending final disposition of the underwriting

Answer 25

All- or- none underwrit

Question 26

_______ underwriting sets a floor or minimum (the least amount the issuer needs to raise to move forward with the underwriting), as well as a ceiling or maximum on the dollar amount of securities the issuer is willing to sell.

• the underwriter must locate enough interested buyers to support the minimum (floor) issuance requirement.
• once the minimum is met, the underwriter can expand the offering up to the maximum (ceiling) amount of shares the issue or specified.

Answer 26

Mini-max underwriting

Question 27

Type of underwriting where the investment banker is acting as principal

Answer 27

Firm commitment underwriting

Question 28

_____________ underwriting is a widely used type of underwriting contract. Under its terms, the underwriters contract with the issuer to buy the securities.

• the underwriter buys shares from the assure and resells the securities to the public at a higher price – the POP – and earns this price differential (spread) for its efforts.
• here, the underwriters are acting as principles rather than agents.
  
  • they are committing to purchasing any unsold shares for the syndicate account.
• it is the underwriters who are at risk for any shares they cannot sell to the public, not the issuer.
• if the shares cannot be sold, the underwriter must place the securities into his inventory and run the risk of losing money, should the position fall in value.
• The issuer knows that ultimately all the securities will be sold and all the capital needed will be raised

Answer 28

Firm commitment underwriting

Question 29

Note

Answer 29

A firm may never guarantee to a customer that it will agree to repurchase the shares at the POP if the deal subsequently trades lower.

Question 30

A type of joint venture where the BDs form up to share both the risk and the profits from the offering.

• One of its members will take on a lead role and provide significant resources to the venture - this role is called the managing underwriter.

Answer 30

Syndicates

Question 31

A type of joint venture where the BDs form up to share both the risk and the profits from the offering.

• One of its members will take on a lead role and provide significant resources to the venture - this role is called the managing underwriter.

Answer 31

Syndicates

Question 32

Often _____ Will bring in other BDs to assist in the sale of securities

• the members of the selling group do not commit capital, nor do they hold the securities and inventory the way a _____ member does.

Selling group members take on no liability for unsold shares

Answer 32

Syndicates

Question 33

Institutional, retail, and accredited all represent types of _______.

Answer 33

Investors

Question 34

Is an entity that pools money to purchase securities and other investment assets.

Can include banks, insurance companies, pensions, hedge funds, investment advisors, and mutual funds

Answer 34

Institutional investors

Question 35

Some institutional investors are called ______________ (QIBs).

• this generally means that the QIB owns and invests a minimum of $100 million insecurities on a discretionary basis.

Answer 35

Qualified institutional buyers

Question 36

Your typical ________ investor is investing his own assets.

• generally those investors that do not qualify as institutional investors
• most are small investors
• sales have higher communication and disclosure expectations

Answer 36

Retail investors

Question 37

________ investors are a subset of investors made up of all institutional investors and certain retail investors.

Answer 37

Accredited investors

Question 38

______ investors who are accredited investors are

• insiders of the securities issuer (officers, board members, major stockholders) or
• meet certain financial criteria:
  - an income of at least $200,000 or more the past 2 years and expected to meet that criteria in the current year (if the purchase isn’t a joint name, this number is increased to $300,000)
• or have a net worth of $1,000,000 or more (not including equity in the primary residence)

Answer 38

Retail investors

Question 39

The _____ investor Will have a higher sophistication level than the average ___ investor and does not need the same level of protection.

Answer 39

Accredited investor, retail investor.

Question 40

Take note

Answer 40

Retail and institutional investors are active participants in the secondary markets, but the designation of accredited investor is used exclusively in primary market transactions.

Question 41

_______ advisors are a type of investment banker that advises municipalities on the issuing of municipal debt and other types of municipal securities.

• work under a contract with the municipality to provide advice on issues such as debt structure, bond features, and other issues involved with raising capital.

Answer 41

Municipal advisors

Question 42

May assist in some of the underwriting functions, such as preparing the official notice, but they may not be compensated as part of the underwriting (sale) of any issue they provide advice on..(in other words, they may not switch roles from an advisor to another writer)

Answer 42

Municipality advisors

Question 43

An investment banking firm that enters into a contract with a municipality to provide advice and direction on raising capital for the municipality is

A. A.Syndicate member
B. A muni dealer
C. A municipal advisor
D. A bond dealer

Answer 43

C.

This relationship between a municipality and advisor is the role of a municipal advisor.

The other terms are for investment bankers involved in the actual sale of the issue or in the secondary markets.

Question 44

A corporation that seeks to sell its own stock to raise money for building a new factory is an example of

A. A selling group member
B. An underwriter
C. A market maker
D. An issuer.

Answer 44

D.

The company selling its own securities to raise capital is the issuer

Question 45

An underwriter that assists a corporation on the sale of a new issue without taking the security into inventory is underwriting on what type of underwriting?

A. Best efforts
B. Firm commitment
C. Partial commitment
D. Full or none?

Answer 45

A.

The underwriter who does not commit capital and take the issue into its inventory is acting on a best efforts basis

Question 46

Also known as the paper act

Answer 46

Securities act of 1933

Question 47

Protects investors who buy new issues by

• requiring registration of new issues (unless exempt under the act)
• requiring an issuer to provide full and fair disclosure about itself and the offering
• requiring an issuer to make available all material information necessary for the investor to judge the issuers merit
• regulating the underwriting and distribution of primary issues and
• providing criminal penalties for fraud in the issuance of new securities.

Answer 47

Securities act of 1933

Question 48

Is the primary federal regulator in the securities industry?

Answer 48

Securities and exchange commission (SEC)

Question 49

When an issuer desires to sell a security that does not meet one of the exemptions to register under the 1933 act The issuer must first be registered with ________________.

Answer 49

Securities and exchange commission (SEC)

Question 50

Also called an S-1.

Filing a _______. Is considered the first step in the process of registering with the SEC

Answer 50

Filing a registration statement

Question 51

This statement discloses material information about the issue.

Including a disclosure document called a prospectus, which must be provided to all purchasers of the new issue

Answer 51

Registration statement

Question 52

True or false?

Registration statement must contain

• a description of the issuers business
• the names and addresses of company officers and directors, their salaries, and a 5-year business history of each
• the amount of corporate securities company officers and directors own and identification of investors who own 10% or more of the company
• the company’s capitalization, including its equity and debt
• a description of how the proceeds will be used, and
• whether the company is involved in any legal proceedings

Answer 52

True

Question 53

After filing the registration statement, the _______ period begins.

• last for a minimum of 20 calendar days, though the period is often longer

Answer 53

Cooling off period

Question 54

Take note

a tombstone advertisement
- provide bare bones/ minimum information
- an announcement and description of the securities to be offered
- are the only form of advertising that is permitted during the cooling off period.
- not required to be filed with the SEC

Question 55

The time between the registration filing with the SEC and the effective date (when the SEC allows the security to be sold)

Answer 55

Cooling-off period

Question 56

Maybe placed by the issuer directly or with the assistance of the underwriters

Limited to the following information

• name of the issuer
• type of security being offered
• number of shares to be sold
• public offering price (POP), or range if the POP is not yet set
• names of the underwriting members (one place by the underwriters instead of the issuer)

Answer 56

Tombstone ads

Must contain the following advisory:

” This announcement is neither an offer to sell nor a solicitation of an offer for any of these securities. This offer is made only by prospectus”

Question 57

A _________ prospectus also called a red herring.

• can be used as a prospecting tool, allowing issuers and underwriters to gauge investor interest and gather indications of interest.
• No final price included, though a range is often included.
• must be made available to any customer who expresses interest in the securities during the cooling off period

Answer 57

The preliminary prospectus

Question 58

Also known as blue sky filings

• the process of coordinating the federal and the state registrations
• when the proper forms have been filed, the security is registered in the states. At the same time it is released for sale by the SEC

Answer 58

State registration requirements

Question 59

Also known as the effective date

Sometime on or after (Usually after) 20 days, the SEC will allow the security to be offered to investors

• starting on this date, investors may purchase the issue.
  
  • generally, it will begin the secondary markets shortly after the IPO.

Answer 59

Release date

Question 60

Important note

Answer 60

The SEC does not approve the issue.

The SEC avoids language that sounds like an endorsement, preferring to say it allows the issue to be released.

Question 61

Is also available at release.

• will be delivered to all who purchased the new security at the IPO.
• will contain the same information as the preliminary prospectus plus two additional items: the release date and the POP.

Answer 61

Final prospectus

Question 62

Must include

• description of the offering
• offering price
• selling discounts
• offering date
• the use of the proceeds
• description of the underwriting, but not the actual contract
• statement of the possibility that the issues price may be stabilized
• history of the business
• risks to the purchasers
• description of management
• material financial information
• legal opinion concerning the formation of the corporation
• SEC disclaimer

Answer 62

Final prospectus

Question 63

Prior to the filing of the __________, No sales can be solicited and no prospectus can circulate

Answer 63

Registration statement

Question 64

No one can solicit sales during the _________, but indications of interest can be solicited with a red herring

Answer 64

Cooling off period

Question 65

On the _____ date sales can now be solicited, but the firm must use a final prospectus

Answer 65

Effective date (release date)

Question 66

Though the process differs somewhat from the IPO, and APO still requires a filing with the SEC and a prospectus. This may be a accomplished as a ____ offering as covered in part one.

Answer 66

Rights offering

Remember, rights are offered to existing shareholders. As they are shares on offer before being made to the public

Question 67

Test topic alert

Answer 67

If the issuer of the security is receiving the funds from an offering, this is a primary market transaction.

There an IPO, APO, or something else, if the issuer is getting the money it is a primary offering

Question 68

Through a _______ registration, an issuer who is already a publicly traded company can register new securities without selling any of the new shares until later

Or

Some of the shares initially, and waiting to sell the remaining portion of the shares.

Once filed, the registration is good for 2 years and allows the issue to sell portions over a two year period without having to reregister the security.

• allows issuers to quickly raise capital when needed or when market conditions are favorable

Answer 68

Shelf offering registration

Question 69

Take note

Answer 69

For securities offered via a shelf registration, a supplemental prospectus must be filed with the SEC before each sale

Question 70

Formerly known as an over-allotment option.

• allows the underwriters to increase the number of shares offered up to an additional 15% if there is sufficient demand
• fairly common option for offerings where heavy demand is expected

Answer 70

Green shoe option

Question 71

Seabird airlines is selling shares to the public for the first time. The company intends to use the proceeds from the sale of it stock to purchase several new passenger aircraft. This offering is an example of

A. A secondary offering
B. A right suffering
C. An initial public offering.
D. A subsequent primary offering

Answer 71

C.

This is the first time this company has made it stock available to the public, so this is an initial public offering

Question 72

The Hugh Lumber Company’s common stock is currently trading at $32 in the market. Hugh is preparing to sell additional shares to raise money for a new mill. This is an example of

A. A secondary offering
B. A hybrid offering
C. An initial public offering
D. Subsequent primary offering

Answer 72

D.

The company is already trading in the market, so it’s IPO is sometime in the past

The sale shares by the company is an APO (or subsequent primary offering)

Question 73

During the cooling-off period, and underwriter may do all the following except

A. Gather binding indications of interest
B. Distribute red herrings to the interested parties
C. Performed due diligence
D. File required forms for state registration

Answer 73

A.

There are no binding indications of interest. Indications of interest are non-binding. All the other functions mentioned are allowed during the cooling- off period, as are not binding indications of interest.

Question 74

When securities are required to be registered in order to be sold to the public, they are known as _______ securities.

Answer 74

Non-exempt

Question 75

Because the issuer is the federal government, an agency of the federal government, a municipal government, or because another government regulatory agency has jurisdiction over the issuer.

These exempt securities include

• US government securities
• municipal securities
• commercial paper, bankers acceptances, and other securities that have maturities of 270 days or less
• fixed a life insurance policies (such as term or whole life) and fixed annuity contracts ( but not variable annuities or variable life policies)
• National and State Bank (not bank holding company) securities
• building and loan and savings and loan securities
• charitable, religious, educational, and non-profit association securities
• interest in common carriers (example: railroad equipment certificates) and
• banks

Answer 75

Note

Question 76

Test topic alert

If you see the word “ variable” or the phrase “ separate account product”,

The Product must be registered

Answer 76

Note

Question 77

Regulation A+ was established to ease the requirements for ______ and ______ - sized companies to raise capital.

• provides two offering tiers
  
  • tier one has no investment limits
    However
    Tier 2: allows securities offerings up to 20 million in a 12-month period of the 20 million No more than 6 million can be sold on behalf of existing shareholders

Allows securities offerings up to 50 million in a 12 month period. Of the 50 million, no more than 15 million can be sold of a half of existing shareholders.

Tier 2 investors must be qualified investors

Regulation A + specifically excludes investment companies (private equity funds, venture capital funds, and hedge funds)

Yes, you are files and abbreviated notice of sale, or offering circular, with the regional SEC office. Investors are provided with this offering circular rather than a full prospectus

Answer 77

Small and medium size companies

Question 78

Under Rule ____, offerings that take place entirely in one state are exempt from registration when the issuer has its principal office (headquarters) in the state and all purchasers are residents of the state.

In addition, the company must meet one of the following criteria

• it receives at least 80% of its income in the state
• at least 80% of the issuers assets are located within the state
• at least 80% of the offering procedes are used within the state
• the majority of the companies employees must work in the state

Answer 78

Rule 147

Also, if there is a broker dealer acting as underwriter, the BD must be based in the state

Security sold under rule 147 may not be resold to not residents of the state for 6 months after the initial purchase